Bangkok--25 Jul--Fitch Ratings
Fitch Ratings (Thailand) Limited has revised Thailand-based GMM Grammy Public Company Limited’s (GMM) Outlook to Positive from Stable and affirmed its National Long-Term Rating at ‘BBB+(tha)’. At the same time, the agency has affirmed its National Short-Term Rating at ‘F2(tha)’. The rating action follows GMM’s announcement that its pay TV business and CTH Public Company Limited (CTH), one of Thailand’s major pay TV operators, would swap shares.
The Positive Outlook reflects GMM’s lower exposure to execution risk of the pay TV business following the transaction and an improved financial profile, once the pay TV business is deconsolidated.
KEY RATING DRIVERS
Deconsolidating Pay TV Business: GMM’s share swap deal with CTH to offload its loss-making pay TV business is positive to its credit profile. GMM’s pay TV business will be integrated with CTH’s pay TV operation, in which GMM will own 10%. The transaction will result in the deconsolidation of pay TV operations from GMM’s financial statements.
Better Projected Credit Profile: The transaction will reduce GMM’s exposure to execution risks in the pay–TV business, and allow the company to focus financial and management resources on its new digital TV business. Fitch expects GMM’s earnings and cash flow to improve in 2015 due to a reduction in pay TV-related costs, including cash operating cost (THB700m-800m) and capex for content acquisition (THB600m-1bn). This will be more than enough to offset the subscription revenue foregone (THB1bn-1.2bn).
Remaining Challenges for Digital TV: The transaction will improve GMM’s leverage outlook in the medium term - FFO-adjusted net leverage is likely to fall below 3.5x in 2015 and 2016 from over 5.0x expected at end-2014. However, before upgrading GMM’s rating to ‘A-(tha)’, Fitch would expect GMM to be able to demonstrate a strong cash flow generation from its digital TV business and a sustained positive free cash flow. Nevertheless, the Positive Outlook indicates that these conditions may be met within two years.
Expanding Broadcasting: Digital TV is likely to be a key growth driver for GMM in the medium term. The company launched digital TV channels in May 2014, after it won the bidding for two licences in December 2013. The company aims to move most of its content from satellite TV channels to the new digital TV platform, while gradually adding new programmes to the new digital TV platform to be in line with the expected advertising revenue growth. The likely higher advertising rates for digital free TV due to wider viewer coverage than that of satellite TV should boost the group's revenue in the medium term. However, the size and presence of a number of new operators in the digital TV market may lead to higher price competition than expected.
Margin Pressure: Low earnings from the digital TV business will put pressure on GMM’s profit margin in 2014. Nonetheless, the profit margin is likely to improve in 2015 and 2016 as revenues from digital TV increases. With the operating costs of this business largely fixed, a large proportion of any increase in revenue translates into profit.
Large Investment: Fitch expects the high digital TV licence fee to result in negative free cash flow and limited financial flexibility for GMM for at least two years. However, the likely increase in earnings after 2015 is likely to improve GMM’s financial leverage.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- The company demonstrates strong cash flow generation from its digital TV business, leading to positive free cash flow while FFO-adjusted net leverage is below 3.5x, both on a sustained basis.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Earnings and cash flow deterioration leading to FFO-adjusted net leverage of over 4.5x on a sustained basis.